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Dan Caplinger is an attorney and financial planner covering retirement, ETFs, personal finance, and general investing for the Motley Fool. With nearly 20 years of diverse experience as a tax and estate planning lawyer, trust administrator, personal financial advisor, and independent consultant, Dan has developed a healthy skepticism of the mainstream financial industry and aims to make complex legal and financial concepts easier for his readers to understand. Dan has worked with the Motley Fool since 2006 as a retirement, tax, and investing expert with a focus on introducing new investors to the opportunities of smart financial planning.

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Student loans have become an increasingly large portion of the debt burden that Americans face. During the past six years, consumers have paid down their outstanding balances on most forms of debt, including mortgages, credit cards and auto loans, according to the New York Federal Reserve.

But student loan balances have continued to increase. The Consumer Financial Protection Bureau noted earlier this year that outstanding student debt would shortly hit the $1.2 trillion mark.

Most of the loans that students take are federal government loans, with various features that can include subsidies for interest payments while you're in school, fixed interest rates throughout the life of your loan, and opportunities for deferments, forbearance, and even outright loan forgiveness under certain circumstances.

But even though private student loans represent a small portion of the overall loan market -- about 14 percent, according to figures from the CFPB -- the lenders that offer private loans have gotten a number of complaints from borrowers citing various problems.

Let's take a look at the CFPB report that goes through types of trouble borrowers have had recently with their student lenders to find some key conclusions.

1. Lenders Want Your Business.

For the most part, few borrowers cited any problems with actually getting a private student loan. Just 4 percent of the complaints to the CFPB had to do with obtaining loans, strongly suggesting that most of those who need financing aren't having banks turn them away.

Lenders have good reasons to prefer student loans. Unlike most other forms of debt, student loans give creditors protection against discharge in bankruptcy, meaning that borrowers often have to repay their student debt even if they go bankrupt and have other debts wiped out.

2. Competition Is Limited.

Looking at which lenders got the most complaints, Sallie Mae (SLM) was the winner by far, with nearly 800 complaints representing almost 40 percent of the total complaints received during the report's six-month scope. That's more than four times what the No. 2 lender received. Wells Fargo (WFC) and Discover Financial (DFS) also had more than 100 complaints each.

These numbers reflect just how concentrated the market is for private student loans. Only a small number of lenders control a large portion of the industry's overall market share, according to the report.

3. Repayment Problems Are Paramount.

The largest group of borrowers' complaints focused on the inability to get their lenders to agree to modifications of their loan terms. Unlike federal loans, many of which have built-in safeguards aimed at helping those in need avoid complete default, private loan borrowers often lack the right to reduce monthly payments when they're under financial stress. Moreover, some borrowers argue that their lenders haven't given them more favorable terms, such as lower interest rates, once they've built up a more favorable credit history than they had when they first took out their loans.

In addition, some complaints focused on payment processing that created additional fees.

For instance, when borrowers paid only a portion of the amount due on their loans, some lenders divided up the underpaid amount equally across each individual outstanding loan, resulting in far more fees than if the lender had used the payment to cover as many minimum payments as possible.
Even borrowers who were able to repay their loans on time, in full, and according to their original terms had some troubles. Difficulty in having payments on multiple loans accurately applied to each required payment resulted in many complaints. In particular, when borrowers made payments that were above the minimum required monthly amount, lenders sometimes failed to apply the extra amount in the way that was most advantageous to the borrower.

Moreover, promises from lenders that co-signers would be taken off loans after a certain number of payments weren't always kept, with modifications to policies having been made in some cases even after students got the loan.

Be Careful With Private Loans

These problems are just a few of the reasons why private student loans should generally be your last resort when it comes to financing a college education. With unattractive terms that usually make these loans more costly, the complaints about private lenders merely add insult to the injury of having to go into debt for education in the first place.

Timing Your Spending

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tfarnon

I was lucky. Even though I'd been saving and investing for all the wrong reasons, when I decided it was time to go back to school, I had the money to do so. I could have paid for my tuition and living expenses out of those savings. I chose not to, because I was betting (correctly, as it turned out) that I would make more in capital gains, interest and dividends on those investments than I would pay in interest on student loans. I "only" took out federal loans, secured and unsecured. I got by on just that.

There was no way I could have worked while in that degree program. It was simply too demanding. I also knew I didn't have to work while I was in school because I could afford not to. I directed all my efforts to doing well in my degree program, and I took my studying as seriously as I would take a "real" job. It paid off. I'm employed in my new field, and I like it.

I do have the loans to pay off, and my job pays enough to live small and pay the loans off at the fastest "regular" rate. Of course, I could still dip into my old savings and investments, but I'm still gambling that they will continue to increase in value at a higher rate than my student loan interest. If that changes, then yeah, I'll consider paying off the loans early.

I don't have a moral to convey here. I went back to school when I knew I'd be unemployed anyways, and I had the financial reserves to do so. I happen to like the field I've chosen, and it's a field that pays reasonably well. Not everyone can do things the way I did, and I don't have any good advice for them.

Sounds like most private student loan signers want a bailout from taxpayers like government provided student loans. If you took the loan, then pay it back and quit whining. Private lenders does not get government bailouts like the big banks did. If you can afford to go to college, wait until you can. I worked my way through school. What's wrong with that?